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Wrangling With Wrigley

ALEXANDRIA, VA (August 31, 1999) --Wm. Wrigley Jr. Company(NYSE: WWY) is 107 years old, but despite its age, the company continues to create significant new value for shareholders. The stock has declined in price only one year in nearly the past two decades. Even during this unusual rip-roaring market of the past five years, Wrigley has outperformed the S&P 500 by a fraction.

"Only by a fraction?" you might say. To which I'd respond: "Yes, but that is during a very heady market. I would expect Wrigley to outperform by a higher margin during a weak to very weak stock market. It is stable, yet it kept up with the booming market, too."

The issue of the stock's potential, however, is where some Fools on the message board disagree.

First, thank you to everyone who posted thoughts on the Wrigley message board and on the Drip Companies board. The consensus appears to be that the company is a recognized powerhouse in the gum industry (with 50% U.S. market share) and is managed with astute aplomb. It is a company that Buffett and Munger often cite as the type of company in which they would invest, the only problem being that everyone already knows that it is that type of company. What Munger is implying is that the share price is anything but below its intrinsic value. Why would it be?

With 62% of sales last year taking place in international markets (42% in Greater Europe and 20% in the Asia-Pacific), Wrigley is known around the world as a leading gum producer and marketer. Through its subsidiaries, Wrigley makes its own gum base, flavorings, and mint oil. It manufactures the end product -- gum -- in over 12 countries, including a new plant that opened this year in Whatchamacallit (I mean Russia). Plus, Wrigley is only beginning to make headway in the most populous country in the world, China. Although Wrigley's gum has presence in major cities, making inroads into the vast country remains on Wrigley's "To Do" list.

Despite a strong U.S. dollar that has weakened translated results for most international U.S. firms, including Coca-Cola(NYSE: KO) and Gillette(NYSE: G), Wrigley has grown sales each of the past four years. It has achieved record international volume growth as well. Management has continued to pay out 50% or more of net earnings in the form of a dividend. At the end of each year, the company offers a special dividend depending on the size of net earnings, as explained by Dave Fish on the message board. Management aims to always pay out at least 50% of net earnings, and Wrigley has increased its dividend annually for the past 18 years.

If the company was only paying a special dividend and not reinvesting money back into its business, we probably wouldn't be interested in the stock. However, the company is growing its business with earnings that it retains. It remains free of debt, too. Given this, the opportunity to directly participate in 50% of Wrigley's annual net earnings via a dividend (despite those who lament dividends due to tax issues) is an added attraction to us -- especially because we would reinvest the dividend.

Wrigley's growth prospects are where people land on difference sides of the ballpark. It seems many people believe that Coca-Cola can grow aggressively over the next two decades, but something just as simple and low-cost as Coke, such as Wrigley's gum, will not grow as much. Why exactly? Because gum doesn't translate as easily into international markets -- some say -- as does soda. This statement can be questioned, though. Selling soda in a tea-centric China could very well have been more difficult than moving gum into the market.

I don't see why gum sales can't grow at a rate similar to beverage growth rates over the next two decades. In fact, it is logical to me that gum sales could grow even more. For one, the market is less diluted. Secondly, many people already drink soda regularly, but many people do not yet chew gum as often as they could.

Others argue that Wrigley is simply lacking something -- that final "oomph" to get them to invest; the final incentive; the final kick in the pants. It is a strong, reliable company, and it is growing and should continue to lead its market, but the final motivation to buy just isn't there. Perhaps, they say, it isn't exciting enough. Instead, they'd rather invest in pharmaceuticals or in Intel (Nasdaq: INTC), something more exciting.

I can certainly see this argument and I agree on various levels. The food and beverage industry, although consistent, is not the first place that one runs to for market-smashing growth. This giant industry grows slowly, often along with inflation. Typically, only the leaders can put up better growth numbers -- the kind that excite even long-term investors.

So I asked myself, "What gave Campbell Soup(NYSE: CPB) that final 'oomph' that made us buy it, and does Wrigley lack that?" What interested me in Campbell Soup, in the end, were the many initiatives being taken by management to better its business. Management was focused. (It still is.) It was determined to be a top-tier grower in the food industry. (It is, and probably will continue to be.) The company even managed to get investors excited about its potential, speaking of new marketing campaigns and promotions, new products, the potential behind the ready-to-eat market, and the increased profitability following spin-offs and cost-cutting. Everything was moving in the right direction. This was the New Campbell Soup.

These "positives" are in place at Wrigley as well. For example, in 1994, Wrigley launched its first new sugar-based gum (Winterfresh) in almost two decades. By 1996, Winterfresh was second only to Doublemint (another Wrigley gum) in the United States. Wrigley also continues to lower costs, focus on key products, acquire smartly, and is striving (and succeeding!) to grow volume. Wrigley has all of the pieces in place.

So, the final oomph may be missing because Wrigley has had all these pieces in place and has been going in this direction for many years. It doesn't need to make noise about it now. Wrigley is taking action and has been, one could argue, for decades. It is very deliberate. It is even very quiet. But it is action, and it is working, even though it doesn't grab headlines.

Can it continue to work for two more decades? Can Wrigley's stock top the market? Can we dollar cost average into this well-run company and earn our 15.5% bogey return? That might be a lot to ask, but it was a great deal to ask from Campbell, too, or from Coca-Cola. In fact, we are actually hoping for this rate of growth -- or more -- from Intel or even J&J. However, with our food and beverage diversification, we're hoping for more stability and any return over 12% would be gravy. Can Wrigley return 11% or 12% annually? Managed well, yes it could. It has the market base and the necessary position of leverage. Can it do so without debt and without great risk? One would speculate so.

So, one of the greatest unknowns in Wrigley's total return equation is the share price. Is the stock priced reasonably enough for us? Wrigley now trades at $78, well below its $100 high. We will need to consider the valuation closely. We also are working to arrange an interview with a VP at Wrigley so we can get insight into its growth strategies. To close today, Longtermguy summed up some key points about Wrigley in his post that answers others' concerns about the company's potential. To share your thoughts, simply post 'em!